Swedish engineering company Hexagon has been overshadowed by bigger local peers, but is well worth a look.
Sweden is well known for its engineering companies such as Atlas Copco, Saab, Sandvik, and Volvo. A more obscure Swedish name in this field is Hexagon AB (Stockholm: HEX AB), a precision-engineering and software company with a market value of €16bn. It combines sensors, satellite-based positioning technology and software to transform clients' operations and improve their productivity.
For instance, Hexagon developed the first complete industrial assembly process based on laser measurements for the Airbus A380 programme. The system uses four Hexagon laser trackers (two for the wings and two for the fuselage), all connected to special control and measurement software. China HQC, meanwhile, used Hexagon to design the world's largest indirect coal liquefaction project. This involved more than 13,000 pipelines and 2,400 pieces of equipment that had to withstand high temperatures and internal stress.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Hexagon has customers across a diverse range of industrial sectors, from agriculture and construction to manufacturing and mining. It invests a high 10%-12% of sales in research and development (R&D) to drive organic growth and also made ten small acquisitions during 2018. It is profitable with a very high operating margin of almost 25%, while sales have jumped by 50% in six years. Earnings per share have doubled over the same period.
A large global footprint
This wide geographic and sectoral spread of sales ensures stable sales and earnings since a recession in one region or sector is compensated for by growth in another. In the fourth quarter of 2018 double-digit growth was recorded in Russia, Eastern Europe, South America, India and Japan while the Middle East contracted and Western Europe grew by 5%.
Hexagon introduced several new products last year, including an anti-jam antenna for offshore oil and gas platforms to nullify jamming and interference that can overpower satellite signals. Then there is a next-generation airborne mapping system, Leica TerrainMapper, used for forestry monitoring and infrastructure planning.
Bricsys develops computer-aided design (CAD) software for collaborative building design. Bricsys adds to Hexagon's existing structural and piping design range to enable the company to offer an end-to-end platform covering conceptual design, CAD, building information modelling, collaboration tools, project and cost controls, and progress documentation. In a full year Nextsense should add revenue of €16m, AutonomousStuff €51m and Bricsys €16m. All three are therefore small but important additions to Hexagon's range of products.
A highly profitable performer
|Hexagon AB (Stockholm: HEX AB)|
|Investment measure||Investment ratio|
|Market Cap||SEK157bn||P/E (2020)||16.8|
|Share price||SEK441.3||Net debt||€1.87bn|
|Earnings per share||€1.84||€2.01||9.2%|
|Dividend per share||€0.53||€0.59||11.3%|
Hexagon's first-quarter results were announced on 7 May and showed sales growth of 10% from the first three months of 2018. Part of this growth came from acquisitions; organic growth hit 4%.
Overall growth would have been 17% had the safety & infrastructure arm of GES sold as much as last year rather than 17% less. Hexagon is taking action to stabilise the division in the second quarter and regain growth later this year to raise the overall organic growth rate substantially. Risks include the possibility that this could take longer than expected, while the US-China trade dispute could hamper growth.
Hexagon's three acquisitions in the first quarter of 2019 were Thermopylae (mapping for US defence and intelligence customers), J5 (industrial operations management software) and Etalon (smart factory systems). These and other 2019 acquisitions will drive growth. New launches in the January-to-March period included products for mine operations management, testing and simulation of autonomous driving systems, and three-dimensional long range laser scanners. Analysts predict earnings per share (EPS) of SEK26.2 for 2020 (compared with SEK20.9 for 2018), giving a forward p/e of 16.8. Hexagon is a diversified digital engineering company with an excellent record.
For decades, Dr Mike Tubbs worked on the 'inside' of corporate giants such as Xerox, Battelle and Lucas. Working in the research and development departments, he learnt what became the key to his investing. Knowledge which gave him a unique perspective on the stock markets.
Dr Tubbs went on to create the R&D Scorecard which was presented annually to the Department of Trade & Industry and the European Commission. It was a guide for European businesses on how to improve prospects using correctly applied research and development.
Who is the richest person in the world?
The top five richest people in the world have a combined net worth of $825 billion. Who takes the crown for the richest person in the world?
By Vaishali Varu Published
Top 10 stocks with highest growth over past decade - from Nvidia, Microsoft to Netflix, which companies made you the most money?
We reveal the 10 global companies with the biggest returns since 2013. One firm has posted an astonishing 9,870% return, meaning a £1,000 investment would now be worth almost £82,000.
By Ruth Emery Published